Metropolitan News-Enterprise


Tuesday, September 18, 2018


Page 3


Court of Appeal:

Commerce Clause Not Breached by Differing Tax Treatment

Fourth District Holds There Is No Constitutional Infirmity in Requiring Interstate Companies With Subsidiaries to File Combined Returns While Intrastate Companies Have Choice


By a MetNews Staff Writer


The Fourth District Court of Appeal has rejected the contention by Harley-Davidson that California breaches the federal constitutional Commerce Clause by allowing a corporation with subsidiaries, operating only within the state, to file either separate or combined tax returns, while requiring an interstate company to file a combined report.

Filed Aug. 22 but not certified for publication, the opinion was posted on the Judicial Council website yesterday in the “Published Opinions” category. A publication order was filed Friday. 

Justice Patricia Benke of Div. One authored the opinion. It affirms a summary judgment granted by San Diego Superior Court Judge Joel M. Pressman in favor of the California Franchise Tax Board, which on Sept. 11 requested publication.

Harley-Davidson—which contends that it has paid $1.9 million more in taxes than it would have if separate returns of its units had been permitted—on Sept. 9 petitioned for rehearing, which the justices on Friday denied. The company announced yesterday it will seek review in the California Supreme Court.

Trial Court Opinion

In granting summary judgment, Pressman said:

 “There are currently two methods for corporate tax payers to compute California tax: combined reporting and separate reporting. Separate reporting is that each member of a unitary business files a report of all its income and is taxed by California on that income without apportionment. Combined reporting allows unitary businesses to file as a single business enterprise. For interstate filers, combined reporting is required. Under the applicable provisions a unitary business files a combined report of all its income from all sources, which is then apportioned using a formula to determine how much of the total business income is attributable to California for tax purposes. Once the amount of business income apportionable to California is determined, that amount is then apportioned among members of the unitary business who are actually California taxpayers, to determine the tax liability of each of those entities.”

California “has a valid interest in preventing the manipulation and hiding of taxable income,” Pressman said, adding:

 “There appears to be a legitimate state interest in requiring this form of combined reporting to ensure that all business income from interstate business is accurately accounted for that that it is fairly apportioned. The state has a valid interest in preventing the manipulation and hiding of taxable income….

“There does not appear to be a reasonable nondiscriminatory alternative that would adequately serve the state’s interest. The alternative of allowing separate reporting for out of state business would potentially omit income of certain entities doing business outside the state.”

Benke Agrees

Benke declared:

“After independent review, we also find that there is a legitimate state interest to require combined reporting of taxable income of interstate unitary businesses, to accurately measure and tax all income attributable to California, that outweighs any possible discriminatory effect.”

She went on to say:

“Intrastate unitary businesses have less opportunity for hiding and manipulating taxable income among separate entities, because all of their income is earned and value added within the state’s borders, subject to general state corporate regulation. Intrastate entities are not similarly situated to interstate entities for purposes of filing taxes. Harley-Davidson has given us no facts supporting its claim that requiring intrastate unitary businesses to always file by the combined reporting method would be a reasonable nondiscriminatory alternative.”

The case is Harley-Davidson, Inc. & Subsidiaries v. California Franchise Tax Board, 2018 S.O.S. 4577.


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